Panicking central banks running out of options

The U.S. Federal Reserve and the central banks of four other major economies, in a frantic effort to stem the deepening economic crisis imperiling the global capitalist system, announced on Dec. 12 that they would use $100 billion to attempt a coordinated bailout of some of the world’s largest commercial banks.

Then the U.S. Federal Reserve, The European Central Bank, The Bank of England, The Swiss National Bank and The Bank of Canada upped the amount on Dec. 18 and promised $500 billion in synchronized infusions of money to commercial banks over the following two months.

This infusion of liquidity will involve so-called “auctions,” where the commercial banks can get what basically amounts to cash advances for worthless collateral. It is the latest move in a series of unsuccessful attempts undertaken by the Federal Reserve and other central banks over the past few months to bail out the major commercial banks.

The response from central banks indicated they are following a strategy similar to the one they followed in past capitalist crises of overproduction. In past crises, such as in 1987 and 1998, central banks were able to mitigate the damage from the crises by flooding the markets with liquidity.

This time around, their strategy is not working. Past financial crises were centered in smaller economies and involved smaller financial institutions. For instance, the 1998 crisis centered on the collapse of a single hedge fund, Long Term Capital Management. While certainly a large hedge fund, Long Term Capital Management was only one financial institution among many. Thus it was easier for the Federal Reserve to collaborate with other central and commercial banks to contain the fallout.

The current crisis does not involve just a single hedge fund collapsing and creating a lack of liquidity in the financial markets. Rather, it involves a host of the largest and most integral financial institutions in the global capitalist economy becoming completely insolvent. Banks in almost all of the imperialist countries are loaded down with worthless securities, what Karl Marx termed “fictitious capital,” and their liabilities far exceed their assets. In other words, the banks themselves are bankrupt.

There has already been a run on the Northern Rock Bank in England. Depositors literally lined up outside the bank’s headquarters and demanded their money back. The specter of bank runs on a multitude of the world’s largest commercial banks is clearly a growing possibility that the central banks are deadly afraid of. They are attempting to do everything they can think of to try and stave off a complete collapse.

And it now appears that they are running out of options. A Dec. 14 report showed a marked increase in inflation in the U.S. The report of increasing inflation comes at the same time that the U.S. economy is plunging towards recession. “Stagflation”—which is the unusual combination of rising inflation and a stagnating economy, and is every central banker’s worst nightmare—is poised to strike the U.S. economy with a vengeance.

Even former Federal Reserve chairman Alan Greenspan, who would be very careful not to stir up fears, warned of this stagflation. “We are beginning to get not stagflation, but the early symptoms of it,” Greenspan said on ABC television.

The Federal Reserve is in a “Catch-22” situation. The economy is in a downturn. Bankers and investors are screaming for more rate cuts and liquidity injections. But the Federal Reserve can’t continue pumping money into the markets without further exacerbating inflation.

It appears the Federal Reserve, the most powerful financial institution in the world, has its hands tied at a time when the global capitalist economy is facing the most serious threat to its stability since the Great Depression.